Eminent Domain – Tool For Principal Reduction

There are homes by the thousand in which the home mortgage is in default and in many cases the homes are abandoned. These are homes where the mortgages are held in pooled servicing agreements, which do not allow foreclosure until certain conditions have been met, such as that a certain percentage of the mortgages have been paid off. By the rules of some pooled servicing agreements, no modifications are allowed, or no modifications are allowed if the borrower is more than a year in arrears. So modification and no foreclosure.

If you’re looking to start a fight over dinner at your in-laws, just bring up the topic of eminent domain, specifically as Cornell University Law School’s Professor Robert Hockett is proposing it be used to force the writing down of underwater mortgages for homeowners… and take whichever is the other side. My guess is that you won’t be invited back anytime soon.

Professor Hockett’s premise is simple: underwater mortgage loans and the ongoing foreclosures they create are most significant impediment to our economic recovery. Ergo, the only true solution is to reduce principal balances for those who owe far more than their homes are worth.

He also explains that the problem is that the Pooling & Servicing Agreements (“PSAs”) that govern when and how securitized mortgages may be handled in terms of modifications and principal reductions were not written to take into account the situation we face today, and have been facing since at least 2008. He sees them as “suicide pacts” that are at this point not only preventing our economic recovery, but on a course to cause irrevocable harm to investors and homeowners as well.

And he says cities need to employ the power of eminent domain to break the suicide pact and provide for the writing down of mortgage balances before it’s too late. It’s a plan he and his colleagues have been discussing for roughly six years… and theirs is a group of very smart guys.

Hockett earned his J.D. and LL.M. from Yale University, his Masters in Philosophy and Economics is from Oxford… and he’s done regular consulting work for the Federal Reserve Bank of New York, and the International Monetary Fund. His paper, titled: “It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery,” has become a guide for cities all over the country that are considering the use of eminent domain to deal with the problems caused by foreclosures and underwater loans.

As Hockett says in the paper’s abstract, written in June of 2012:

“Respected real estate analysts now forecast that the U.S. is poised to experience a renewed round of home mortgage foreclosures over the coming 6 years. Up to 11 million underwater mortgages will be affected. Neither our families, our neighborhoods, nor our state and national economies can bear a resumption of crisis on this order of magnitude.”

He’s right about that, of course. And he reminds me of… me.

So, he’s advising cities around the country that eminent domain is the best answer and the mortgage banking and financial services industries are lining up like the Blue and Grey at Gettysburg.

The FHFA calls the eminent domain strategy “a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks,” and is also threatening legal action against cities that use it. And Texas Republican and chairman of the Committee on Financial Services, Jeb Hensarling, has even introduced a bill that would come close to ending mortgage financing in cities that used eminent domain.

The lines have been drawn… the battle appears eminent… pun intended. But Professor Hockett says it’s not going to get tied up in court, in fact, he’s confident that the plan will move forward, beginning with Richmond, California.

I’ve spent weeks… no, maybe it’s been months… considering all sides of this issue and the one thing I can tell you is that it’s a whole lot more complicated than you might think. But, the way things are headed it’s also about to become one of the most important and contentious battles we’ve seen yet, as related to the inequities created by our economic meltdown that continues to widen the gap between the haves and have nots.

So, click PLAY below for Part One: Breaking Securitization’s Suicide Pact Using Eminent Domain with Professor Robert Hockett – A Mandelman Matters Podcast. In 30 minutes you’ll find out what’s really happening on what may soon become the real front line of the foreclosure wars.

Now this is starting to get interesting…

Eminent Domain to Solve the Housing Crisis – PART 2 with Prof. Robert Hockett

If you missed Part One with Professor Robert Hockett on the topic of eminent domain and how it’s being considered by some two dozen cities as a way to solve the housing crisis, then click the link above and start there… but, if you’ve already got Part One under your belt as it were, then here’s the PART TWO you’ve been waiting for… and it’s only getting better from here.

The use of eminent domain is the front lines of the battle to stop foreclosures in this country, there is no solution on the table so controversial, none so vehemently opposed by those that make up the opposition.

So, with no further adieu, turn up your speakers, CLICK PLAY, and get ready for the second installment in what will be a four part series with the man behind the plan to use eminent domain to take over underwater loans and write them down for homeowners… and for the benefit of all… Cornell University Law School’s Professor Robert Hockett.

It’s the sort of in-depth coverage you’ll only find on this… a Mandelman Matters Podcast.